In October of 2014, there was a report that the leading global contract manufacturer Foxconn, had entered into preliminary talks to build a high-end LCD display factory within China’s northern city of Zhengzhou. According to that report, Foxconn and Hon Hai Precision Chairmen Terry Gou visited Zhengzhou in August and met with government officials to discuss an investment proposal estimated to be upwards of $5.59 billion.

Earlier this week, The Wall Street journal cited a statement from a local development agency and reported that discussions concerning the Zhengzhou facility are progressing and may be nearing finalization stages.

This announcement is significant since it would represent Foxconn’s largest investment in component manufacturing thus far and would be an additional sign of further diversification within key downstream strategic components of high tech and consumer electronics supply chains. The Zhengzhou region is also the home of an AppleiPhone assembly facility. Both represent the high tech supply chain ecosystem’s movement into far more interior regions of China.

In its reporting in October, the WSJ stated that it remains unclear as to whether Apple or other investors are being approached to invest in the proposed display plant.

In July, Foxconn disclosed plans to build a new environmentally friendly production complex in one of China’s most rural and pristine provinces. According to a published Bloomberg BusinessWeek at the time, a 500 acre park would be built in the province of Guizhou, on the outskirts of the provincial capital, Guiyang. Plans called for an environmentally focused facility to produce smartphones, large-screen televisions and other products employing upwards of 12,000 workers. Production processes within this new plant were to include new methods for mold based painting, carbon nanotube film for touchscreens and other innovations. The Guizhou plant was slated to be operational this month.

These developments indicate Foxconn’s continued investment in downstream electronics supply chain component manufacturing capabilities as well as this CMS’s continued commitment toward China based production presence. Being Apple’s and other high tech OEM’s prime contract manufacturer, that is an indicator of potential future strategic sourcing strategy.

Missing however, is any announcement of a substantial manufacturing investment in North America.

Business media including the Financial Times and the Wall Street Journal reported last week that Apple was working on a secret research lab (not so secret anymore) possibly directed at developing a concept electric car. According to these reports, under the code name “Project Titan” Apple has several hundred employees working at this research lab designing a concept vehicle that resembles a minivan.

Apple, of course, has declined comment to any of these publications.

According to the published WSJ report, the size of the project team and the senior executive hires are indications of seriousness, with Apple CEO Tim Cook approving the development project almost a year ago. Once more, the report indicates that Apple executives have flown to Austria to meet with contract manufacturers. The publication names the Magna Steyr unit of Canadian auto parts supplier Magna International as one potential party involved.

The report accurately notes that manufacturing an automobile is enormously expensive with a single plant costing upwards of well over $1 billion. Thus, it should be of little surprise that Apple might be investigating existing contract manufacturing options.

Auto supply chain teams know all too well that sourcing production in any particular country and transporting autos among global regions can be an expensive proposition without volume and market scale. It’s clearly not the same as shipping iPhones and iPads or for that fact, ramping-up new product and supply chain labor resources to coincide with a product development lifecycle. Once more, intellectual property (IP) protection becomes a larger consideration because of the nature of the multiple components and new technologies that may be involved. For electric powered vehicles, the design and production cost of the batteries is the single most important material and product margin component.

Another parallel that these reports bring forward is that if Apple becomes serious in pursuing this foray into electric cars, it will likely be a competitor to Tesla Motors, who has been pursuing a vertical integration strategy including the design and production of its own electric storage batteries for automotive and solar energy storage use. Tesla elected to invest in a former Toyota auto factory located in Fremont California.

Certainly, there will be continued speculation as to what Apple ultimately decides to do. However, in the light of our previous Supply Chain Matters challenge to Appleto invest more in U.S. or North America based production, Project Titan could provide the opportunity to consider such an investment commitment, either contract manufacturing or owned manufacturing investment. North America automotive production plants and their associated supply chains have proven world class competitiveness and indeed are exporting vehicles to global markets.

Bloomberg BusinessWeek reports that both domestic and foreign-based auto producers continue to build and subsequently bring online more auto production capacity across China. The report cites a projection that by 2017 there will be 140 auto production plants in China vs. the 123 existing at the end of 2014. The problem, however, is that China’s nationwide domestic auto consumption is far short of this capacity indicating that overcapacity is expected to worsen. Cited is an IHS Automotive chart indicating that China’s excess capacity has jumped 83 percent in the last two years. The article cites a JSC Automotive forecast that by 2017, auto plants across China will be able to produce 11.4 million more cars than are expected to be sold.

The report cites one Shanghai based consultant as indicating that some carmakers are regretting plans to expand plant capacities, but decisions have already been made. Once more, as Supply Chain Matters readers all well aware, China’s domestic market remains an open opportunity for future growth, but the continued battleground pits China’s domestic brands against foreign based nameplates. The obvious consequence is that there is not enough product demand to sustain all manufacturers, and that has the potential for industry consequences.

Production overcapacity is a common problem in China in many industry and commodity sectors and the results have been messy or sometimes ugly consequences. An ongoing overcapacity condition remains for the production of steel. According to Bloomberg, already, car dealerships across China are seeking more financial assistance and lower sales volume targets. China’s domestic consumers will obviously gain more buyer benefits over time.

Europe’s automotive industry has a similar overcapacity challenge since prior to the 2008-2009 global recession, there was already too much industry-wide capacity, and that remains an ongoing challenge.

With China and Europe reflecting overcapacity, global automotive OEM’s must continue efforts to balance global consumption and supply as well as protect margins. Currency headwinds are yet another challenge.

Supply Chain Matters would not at all be surprised by the entry of Chinese produced autos in the U.S. as well as other emerging markets over the next three years.

Throughout the summer and especially in September of 2014, we featured a number of Supply Chain Matters commentaries reflecting on yet another series of Apple supply chain product introduction ramp-ups, and specifically whether the Apple supply chain ecosystem and its internal supply chain teams could yet again pull rabbits out the hat proverbial hat and deliver on business expectations for the all-important holiday fulfillment quarter.

“Over the coming weeks, as the marketing and sales machine cranks-up consumer motivations to buy, the supply chain will deal with the realities of limited supply, production hiccups and product allocation conflicts among various channels that invariably come up in such situations.”

We further declared:

“While some supply chains are challenged with collaborating with sales and marketing on stimulating and shaping product demand, Apple has the current challenge of meeting very high expectations involving an outsourced supply network with many moving parts. They have pulled miracles in the past, and the stakes get even higher.”

Yesterday after the stock market close, Apple announced financial results for its fiscal first quarter ending in December, and the results were staggering, along with the business headlines. The Wall Street Journal headline story today was titled: Apple Delivers Quarter for the Ages.

Apple reported net income of $18 billion for the quarter, was described as more than 435 of the companies within the S&P 500 Index each made in total profits. But the supply chain headline was fulfilling all-time record customer demand for 74.5 million new iPhones. This was up 46 percent from the same holiday fulfillment quarter a year ago, reflecting a lot of pent-up upgrade demand for the new iPhone6 models. In its reporting, the WSJ equated such volume output to more than 34,000 phones per hour, around the clock.

Gross margin was reported as 39.9 percent, nearly two percentage points higher than last year’s similar period. Once more, average sale volume for the iPhone increased to $687, nearly $50 higher than a year ago.

Apple also managed to double its iPhone sales volumes within China during the quarter despite delayed availability slipping to mid-October from the scheduled simultaneous September product launch.

Readers who followed our Apple commentaries should recall that the iPhone6 incurred its own set of production ramp-up challenges including a last-minute design change involving its larger screen displays. There was the usual production yield challenges associated with the fingerprint scanner and with the LCD displays themselves. We called attention to a TechCrunch report that cited sources in September indicating that Apple had already contracted air freight capacity anticipating to flood channels with last-minute shipments.

All was not spectacular news regarding Apple’s latest performance. Sales of the iPad were reported to be down 18 percent from the year ago period. The long-anticipated iWatch availability has now slipped to April of this year. However, these do not take away from the extraordinary performance of the Apple supplier ecosystem, and in particular, its contract manufacturers who had to successfully support the four month production and fulfillment ramp amidst the production challenges.

The Apple supply chain did indeed again pull rabbits out the hat. It performed to enable an expected business outcome, despite operational challenges.

We extend our Supply Chain Matters Tip-of-the Hat recognition for such performance. Let’s hope that the supply chain ecosystem will share in similar financial rewards.

The article profiles a select group of various mid-market industry manufacturers located in the United States such as Thorley Industries, K’Nex Brands, PrideSports, Capital Brands LLC and Lasko, that have addressed the option of returning manufacturing to the U.S. Brought forward are the renewed attraction of lower inventory and transportation costs, stable wage rates and the importance of better control and protection of intellectual property. Another attraction was noted as less international travel, teleconference time and distraction among supply chain and product management teams. Having had manufacturing presence already in the U.S. or North America helps in evaluating a nearshoring decision.

However, the interviews of companies do bring forward the current realities that in certain industries: “The U.S. needs to rebuild its supplier base, as well as invest in more efficient manufacturing equipment.” One example cited is small electric motors utilized in consumer or industrial products. The economics involved in the manufacturing of such motors requires manual assembly as well as very high scaled volumes, and China remains the most globally competitive sourcing of smaller motors. Another highlighted drawback is the ability of certain Chinese manufacturers to flex their workforces in large volumes. There are other select component supply examples as well.

Supply Chain Matters readers are certainly aware that Apple’s manufacturing sourcing strategies that favor China are because of the workforce flexibilities of contract manufacturers who came add thousands of workers in a matter of weeks, as well as their ability to respond to frequent product design changes.

In the end, manufacturing sourcing will always be highly dependent on the industry, supply chain ecosystem, product demand sourcing and overall economics involved in landed costs of a product. It requires that procurement teams continue to hone their strategic sourcing skills and have very collaborative relationships with product management and other supply chain focused planning and execution teams. Supply chain leaders themselves need to be deeply immersed in the various tenets of a strategic sourcing decision including the detailed analysis of pros and cons.

Quantitative numbers reflected in U.S. and North America PMI Indices continue to reflect increased manufacturing momentum for U.S. and North America based manufacturing, but in today’s business climate, the economics can often change, and thus sourcing is no longer a static initiative but rather a continual evaluation and assessment process. Such decision processes can greatly benefit from more sophisticated tools and technologies.

In early August, Supply Chain Matters called attention to a tragic explosion and subsequent fire that occurred at a factory belonging to a Tier Two auto parts supplier located in China. The factory belonged to Kunshan Zhongrong Metal Production Co. and was located in a development zone in the Jiangsu provincial city Kunshan City located about 50 kilometers west of Shanghai. The plant performed plating and polishing of metal hubs that include wheel hubs, a pre-production preparation for aluminum car wheels used by automakers. The explosion was initially believed to have been caused by accumulation of metal dust particles within the facility. At the time of this incident, media reports were unclear as to the full extent of deaths or injuries but the government news agency indicated that 75 workers perished as a result of this accident. The accident was China’s worst industrial disaster in nine years and highlighted continuing problems with workplace safety.

Earlier this week, Chinese investigative authorities reported that the blast killed at least 146 workers, nearly double the initial reported death toll. Reports in August indicated that there were upwards of 260 workers in the plant at the time of the explosion, and this revised number amounts to a significant casualty toll. According to various global and business media reports, Chinese authorities indicated this week that they would prosecute three senior executives of Kunshan Zhongrong Metal Production as well as 15 Kunshan governmental officials. China’s government further announced the firing of two top officials within the city of Kunshan.

According a published report by the New York Times, Beijing has been holding local government officials and company executives accountable by handing out harsh penalties for work accidents with high casualties. In Kunshan, the investigation team found that local officials were negligent in enforcing safety regulations and that plant management failed to provide safety training for workers, ignored rules on building spacing, density in manufacturing lines, dust cleanup, and use of anti-explosion equipment.

As noted in our August posting, previous incidents of explosions caused from combustible metal parts involved two different suppliers to Apple. In May of 2011, a significant explosion rocked a Foxconn Technology Group production facility located in Chengdu, China where two workers were reported killed. In December of that same year, an explosion at a manufacturing facility of Ri Teng Computer Accessory Co., a subsidiary of Pegatron Corp, located in Shanghai’s Songjiang Industrial Park, injured upwards of 60 workers.

This latest report is a further indication that China’s governmental leaders are indeed clamping down on factory safety standards by holding individual executives and investigative agencies accountable for enforcing worker safety standards.